Why Is College So Expensive? And Can Obama Make It Cheaper?

How to control public college costs in two easy steps: (1) Get states to stop cutting education budgets and (2) push schools to become more efficient. Getting it done is the hard part.



Last week, President Obama declared war on the rising cost of college -- or at least, he did so to the degree that a notoriously even-keeled politician with a penchant for policy wonkery can declare war on such things. Speaking at the University of Michigan, he laid out a four-point* plan to reverse the surge of tuition rates and student debt that, for many Americans, is threatening to turn higher education into an unaffordable luxury.

Obama's splashiest proposal would tie federal student aid to a university's ability to keep tuition low. The plan would also create a $1 billion competition (based on the administration's successful Race to the Top program for K-12 public schools) aimed at encouraging states to maintain their level of higher education funding while finding savings for students. The White House also wants to form a $55 million pool to fund innovations that would increase colleges' productivity. And finally, it would require schools to offer scorecards and "shopping sheets" that provide basic consumer information to students, such as simplified financial aid data and whether graduates are getting jobs.

Is this plan just "political theater of the worst sort," as University of Washington President Mike Young put it? Or is it a brave attempt at "tying the method of funding to the outcomes we're looking for," as William Powers, president of the University of Texas at Austin, said? Honestly, it might be a bit of both. Some aspects of the plan look like little more than window dressing in an election year. But overall, it seems like an earnest attempt to hog-tie some of the many wild forces that are pushing up the cost of a college education. 


When looking the cost of higher ed, it's important to make distinctions. There are vastly different issues impacting Harvard or Sarah Lawrence than the University of Michigan or your local community college. And if the policy goal is to make college affordable to most Americans, we should be focusing primarily on the state schools, which educate 75% of all U.S. undergraduates, according to the Delta Cost Project. About 42% of students are enrolled at community colleges alone.

Experts have attributed the rise in state school tuition to a whole host of factors, but the basic story of the past decade looks like this: State legislators are slashing funding, which requires college to either cut costs or raise tuition. At the same time, market pressures have led schools to spend more on student services, which include everything from fancy, L.A. Fitness-quality gyms to career services departments. Because of ample student loan funding, colleges often choose to up their tuition rather make hard budgeting decisions, or look for ways to increase their efficiency.

The White House wants to untangle that knot. And the place the administration has to start is state funding. During the past five years, states have cut 3.8% of their support for colleges. But the reductions haven't been even across the country. Twenty one states actually spend more on higher-ed today than they did in 2007. Meanwhile, New Hampshire and Arizona have slashed their funding by more than 30 percent. Several large states, including Florida, California, and Michigan, also drastically decreased higher-ed spending 

As the states cut back, students paid more. In this graph from the Delta Cost Project, tuition (in purple) rose as state support (in green) declined.


If shrinking education spending is behind higher prices, the White House has a clear first objective: Do everything possible to keep states from cutting their budgets. That's especially the case with community colleges, which are already starved of resources. The $1 billion college sweepstakes fund might help. The program it's based on, Race to the Top, was successful in encouraging states to adopt a whole host of education reforms using a fairly minute amount of money, just $4.35 billion, as an incentive. Whether a smaller pot of money will have the same influence isn't clear, especially since it would require cash-strapped states to look for savings elsewhere.

If the White House can't convince states to keep subsidizing public schools, any hopes of cost containment goes out the window. But the White House also has a plan to make colleges more efficient. It involves a little bit of bribery and a lot of blackmail.

Obama wants to create a $55 million pot of money for schools with the best ideas for becoming more efficient. At the same time, he's threatening to yank federal student aid away from colleges that jack up costs. The president would expand the pool of so-called "campus-based" loan programs -- now $3 billion out of $140 billion in total federal student loans -- to $10 billion, and funnel it to schools that did the best job keeping a lid on tuition prices. Schools that ignore costs would lose funding. Schools that address costs would get the money.
The president of the American Council On Education has said Obama's plan "smacks of price controls." She's right. And we need price controls. Right now, the fastest growing areas of spending at public four-year-research schools don't involve teaching students, according to the Delta Cost Project. A separate study found that public schools could cut education and student services spending by about 25% without hurting quality, creating savings of about $3,000 per student -- more than the average increase in federal loans since 1995.


The administration's plan tries to tackle each of big drivers of public college costs -- shrinking state budgets, rising spending, and bad incentives for colleges. Whether the carrots and sticks in his plan -- $1 billion in state funding, up to $10 billion in student loans -- will be big enough to spur action from colleges or legislatures isn't clear. But the plan is certainly a gesture in the right direction. Its best feature is that it leaves plenty of white space for colleges and states to figure out the details of reform on their own. In an alternate world, the president could have descended from the White House with a burdensome set of specific prescriptions for each college and university to follow. The current batch of ideas might not necessarily solve the entire puzzle of college costs, but at the very least, it seems like it would encourage some much needed experimentation. That's a good start.


*The fifth point in his higher-ed plan involves making tax credits for college tuition permanent and keeping interest rates on student loans low -- but that doesn't strike to the heart of restraining the inflation of college tuition.